Entrepreneurial Law

LWELA2-11

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Week 4: Lesson 1
Introduction

This week we focus on directors and board committees, we will look at the meaning of 'directors',
consider the different types of directors, distinguish between managers and directors, and how the
board of directors is composed.

Our discussion will consider the fiduciary duty and duty of care, skill and diligence expected from
directors in terms of the Companies Act, 2008 as well as case law.

We will also delve into the definition of "audit", the companies' subject to audit, the role of an auditor
and the audit committee.
 What will be covered
in today’s lesson?
Week 4 Meaning of directors and types of

Lesson 1
directors

The composition of the board of

directors

The difference between the role

of a manager and a director

Duties and liabilities of directors

 MEANING OF A DIRECTOR – Section 1

• A director is defined as a member of the board of a company as

contemplated in S66 or is an alternate director.

• Including any person occupying the position of a director or alternate

director, by whatever name designated.

• The definition includes formally appointed directors, as well as a de facto

director – someone who has not been officially appointed but acts as a
director.
MEANING OF DIRECTOR AND TYPES OF
DIRECTORS
• S66 -

o recognises different types of directors

o proves that a person becomes a director only knew when that

person has given his / her consent to serve as a director after having
been appointed / elected or

o holds an office in accordance with the provisions of S66

 TYPES OF DIRECTORS – Section 66
• For purposes of S75 (director's personal financial interests) and S76
(standards of directors' conduct), the following are included as directors
in the Companies Act:

o directors
o alternate directors
o prescribed directors
o members of board committees
o members of the audit committee
 TYPES OF DIRECTORS – Section 66
• ‘the business and affairs of a company must be managed by or under
the direction of its board’ which has the authority to exercise all the
powers and perform any of the functions of the company, except to the
extent that the 2008 Act or the Company’s MOI provide otherwise.

• The company’s MOI can implement some limitations in respect of the

director’s power.

• Example: company’s MOI provides that for certain transactions, the

directors cannot act alone. The transaction will need to be referred to the
shareholder for consideration and approval.
 TYPES OF DIRECTORS – Section 66
• PPWAWU National Provident Fund v Chemical, Energy, Paper, Printing,
Wood and Allied Workers Union:

o Directors must act independently regardless of the views or

decisions of those who appointed them

o A director is not the servant of agent of a shareholder who votes for

or otherwise procures his appointment to the board and in carrying
out his duties and functions as a director, he is in law obliged to
serve the interests of the company to the exclusion of the interests of
any such nominator, employer or principal
 Ex officio director
• A person who holds office as a director of a company solely as a result
of that person holding another office or title or status

• Not appointed by the shareholders

• Holds all the same powers and functions as any other director except as
limited in the MOI

• Such a director has all the duties of and is subject to the same liabilities
as any other directors
 MOI appointed director
• Does not have appointed by the shareholders

• MOI can prescribe how and by whom such a director is appointed

• Example: That debenture holders or other creditors of the company may

appoint a certain number of directors
 Alternative director
• The definition of director specifically includes an alternate director of the
company

• May be appointed / elected depending on the contents of the MOI

• Defined as:
o A person elected or appointed to serve, as occasion requires, as a
member of the board of a company in substitution for a particular elected
or appointed director of that company

• S 66 (4) (a) (iii) provides that the MOI can provide for the appointment or
election of one/more persons as alternate directors

• For Profit company at least 50% of alternate directors must be elected by

shareholders
 Elected director
• At least 50% of directors must be elected by shareholders of a profit company
 Temporary director
• Appointed to fill a vacancy

• The MOI can provide for the appointment of a temporary director.

• Unless the MOI provides otherwise, the directors may appoint a temporary
director.
 Non-executive and executive director
• Executive director –
o a director who is also an employee

• Non-executive director
o are not employee of the company

• The Companies Act and King III endorse a unitary board structure
o this means that a company should have a single board of directors
consisting of both executive and non-executive directors sitting and
making decisions together at the same meeting
Discuss
The difference between a director and a
manager.

Define a prescribed officer.

What are the functions of the board of

directors?
 DIRECTORS AND MANAGERS
• Manager is an employee of company

• Director does not have to be employee of company

• Differences contained in table 6.3 in textbook

• A manager who is entrusted with important functions could be a prescribed

officer and be subject to many of a director’s duties, liabilities and
qualifications. Differences are not as absolute as stated in the textbook
 DIRECTORS AND MANAGERS
• Regulation 38 of the Companies Regulations, 2011 defines a prescribed officer
as any person who:

o exercises general executive control over, and in the management of the

whole or a significant part of the company’s business and activities; or

o regularly participates to a material degree in the general executive control

over, and management of the whole or a significant portion of the business
and activities of the company

o It applies to a person who meets these requirements irrespective of any

title given by the company to an office held by the person in the company
or a function performed by the person for the company
 BOARD OF DIRECTORS
• According to King IV, the functions of the board of directors are:

o to give strategic direction to the company,

o approve policy and planning that gives effect to the direction so provided,

o oversee and monitor the implementation and execution by management,

and

o ensure accountability for organisational performance by means of, among

others, mechanisms of reporting and disclosure
IN GROUPS –
Discuss and present your findings

The duties and liabilities of directors

The fiduciary duty and duty of care, skill and

diligence

The business judgment test

Standards of directors’ conduct: duty to avoid

personal benefits and harming the company
 DUTIES AND LIABILITIES OF DIRECTORS
• The 2008 Companies Act partially codified the director’s duties

o common law principles remain to the extent that they have not been
narrowed by the 2008 Act

o created a statutory defence for directors in the form of the “business

judgment test” which can be used by directors to prove that they have not
acted in breach of their duties
 DUTIES AND LIABILITIES OF DIRECTORS
• S76 introduced a new statutory law - “Standards of directors’ conduct”

• This forms part of partially codified regime of directors’ duties which includes:

o fiduciary duty
o duty of reasonable care
o supplemented by other provisions addressing:
- conflict of interest (s 75)
- directors‘ liability (s 77)
- indemnities and insurance (s 78)

• must still be read in context of common law and these principles will
continue to apply in the absence of any contrary statutory provision
 DUTIES AND LIABILITIES OF DIRECTORS

• Common law –

• Fiduciary duty to act in good faith to the benefit of the company as a whole

• To avoid a situation where the director’s personal interest conflicts with that
of the company

• Companies Act, 2008 –

• re-emphasizes this duty

• ensures harmonization with other legislation

 FIDUCIARY DUTY AND DUTY OF CARE, SKILL
AND DILIGENCE
• Companies Act confirms director is under a fiduciary duty and that he or she must act with a
certain degree of care, skill and diligence

• S76(3) provides that a director must exercise the powers and perform the functions of a
director:

a) in good faith and for a proper purpose;

b) in the best interests of the company; and

c) with the degree of care, skill and diligence that may reasonably be expected of a person –

i. carrying out the same functions in relation to the company as those carried out by that
director; and

ii. having the general knowledge, skill and experience of that director
 FIDUCIARY DUTY AND DUTY OF CARE,
SKILL AND DILIGENCE
• To determine whether a director as acted with the required degree of care,
skill and diligence:

o director must pass both objective and subjective test

o objective test: what a reasonable director would have done in the same
situation
o subjective test: taking into account, the general knowledge, skill and
experience of the particular director
o facts of each case are important to determine whether or not a person has
acted in breach of the fiduciary duty owed to his or her company
o Employees and managers also have certain fiduciary obligations or
responsibilities towards their company
 BUSINESS JUDGMENT TEST

• Introduced into our law by S76(4)

• provides that a director satisfies his or her obligations if:

o he or she has taken reasonably diligent steps to become informed about a particular
matter; and

o either the director had no material personal financial interest in the subject matter of the
decision (and had no reasonable basis to know that any related person had a personal
financial interest in the matter), he or she disclosed the conflict of interest as required by
S75 of the Act; and

o the director had a rational basis for believing, and did believe that the decision was in the
best interest of the company
 BUSINESS JUDGMENT TEST

• Allows a director to show that he/she is not in contravention of his/her statutory

duties

• S76(4)(b) provides that a director is entitled to rely on the performance of

certain people or committees

• a director should not be held liable for decisions that lead to undesirable
results where such decisions were made:
• in good faith
• with care
• and on an informed basis
• which the directors believed were in the interest of the company
 BUSINESS JUDGMENT TEST

• A director should not be held liable for decisions that lead to undesirable
results, where such decisions were made in good faith, with care and on an
informed basis and which the director believed were in the interest of the
company
STANDARDS OF DIRECTORS’ CONDUCT

exercise
the powers

and must act perform

with a certain the
degree of care,
diligence and functions
skill
Director of director
must:

in the best
interests of in good
the faith
company
Any questions?
 What will be covered
in today’s lesson?
Week 4 Directors’ personal financial
interests
Lesson 2
Liability of directors

Indemnification and directors'

insurance

Duties and liabilities of directors

Ineligible and disqualified persons

 DIRECTORS’ PERSONAL FINANCIAL
INTERESTS
• S75 deals specifically with a director’s personal financial interest

• provides that if a director’s personal interest conflict with those of the

company, the director should disclose the conflict of interest in the manner
described in S75
 DIRECTORS’ PERSONAL FINANCIAL
INTERESTS
• Provides that if a director’s personal interest conflict with those of the
company, the director should disclose the conflict of interest in the manner
described in S75

• Company where there is more than one director –

o if a director has a personal financial interest in respect of a matter to be
considered at a meeting of the board OR

o knows that a related person has a personal financial interest in the

matter

o the director must disclose the interest and its general nature before the
matter is considered at the meeting
 DIRECTORS’ PERSONAL FINANCIAL
INTERESTS
• The director is compelled to disclose to the meeting any material information
relating to the matter that is known to the director

§ may disclose any observations or pertinent insights relating to the matter if

requested to do so by the other directors

§ must leave the meeting immediately after making any disclosure

• The director will be regarded as present for quorum, but not for resolution.

• He/she may not execute any document on behalf of the company in relation to
the matter, unless specifically requested or directed to do so by the board
 DIRECTORS’ PERSONAL FINANCIAL
INTERESTS
• If director/person related to the director acquires a financial interest in an
agreement or other matter in which the company has a material interest, after
the agreement or other matter was approved by the company, the director
must promptly disclose to the board/shareholders

• the nature and extent of the interest

• the material circumstances relating to the director or related person’s

acquisition of that interest
 DIRECTORS’ PERSONAL FINANCIAL
INTERESTS
• Decision by the board/agreement approved by the board

• valid despite any personal financial interest of a director, or a person

related to the director

• if it was approved or

• has been ratified by an ordinary resolution of the shareholders

 DIRECTORS’ PERSONAL FINANCIAL
INTERESTS
• any interested person may apply to court

• for an order validating a transaction or agreement that was approved by the

board/shareholders

• despite the failure of the director to satisfy the disclosure requirements

 DIRECTORS’ PERSONAL FINANCIAL
INTERESTS
• Requirements regarding disclosure do not apply where:

• to a decision that may generally affect all the directors of the company in
their capacity as directors

• or a class of persons of which a director is one

• a proposal to remove that director form office or

• to a company or its director, if one person holds all the beneficial interests
of all the issued securities of the company and is the only director of that
company
 DIRECTORS’ PERSONAL FINANCIAL
INTERESTS
the director
may not
and where the
approve or unless the after the
director does
enter into any agreement is director has
Where not hold all
agreement in approved by disclosed the
company has the beneficial which that the ordinary nature and
only one interests of all
director or a resolution of extent of that
director the issued
related person the interest to the
securities of
has a personal shareholders shareholders
that company
financial
interest

• The meaning of a director has an extended meaning in this respect and includes an alternate
director, prescribed officer, member of the board committee and member of the audit committee.
 LIABILITY OF DIRECTORS
• In addition to the common law remedies, the following sections provide for the
personal liability of directors:

• S77: liability of directors and prescribed officers

• S218: civil actions

 LIABILITY OF DIRECTORS
• S77 - liability of directors and prescribed officers

• a company may recover loss, damages or costs sustained by the company

from a director under the following circumstances (page 167 in textbook)

• director will be jointly and severally liable with any other person who is or
may be hold liable for the same act

• proceedings to recover any loss, damages or costs may not be

commenced more than three years after the act or omission (giving rise to
the liability) occurred

• also gives a director a statutory defence – business judgment test

 LIABILITY OF DIRECTORS
• S77(9)

• in any proceedings against a director

• court may relieve the director
• either wholly or in part
• from any liability set out in this section, on any terms the court considers just
if it appears to the court that:

§ the director is or may be liable, but has acted honestly and reasonably; or
§ having regard to all the circumstances of the case, including those
connected with the appointment of the director, it would be fair to excuse
the director

• does not apply where the director exercised willful misconduct or willful
breach of trust
 LIABILITY OF DIRECTORS
• 77 (10)

• a director may anticipate any claims in terms of S 77

• a director who has reason to believe that a claim may be made alleging that
the director is liable, other than for willful misconduct or willful breach of trust,
may apply to a court for relief, and the court may grant relief to the director on
the same grounds as if the matter had come before the court in terms of sub-
s (9)
 LIABILITY OF DIRECTORS
• Section 218 - civil actions

• any person who contravenes any provision of this Act is liable to any other
person for any loss or damage suffered by that person as a result of that
contravention

• wide enough to include a monetary claim by anyone against a director

personally if that director contravened any provision of the Act and thereby
caused that person to suffer monetary loss

• Does not only apply to directors – any person who did not comply with the Act
 INDEMNIFICATION AND DIRECTORS'
INSURANCE
• S78
• deals with indemnification and directors’ insurance
• applies also to former directors of the company
• a company cannot undertake not to hold a director liable for breach of
fiduciary duties
• any provision that purports to relieve a director of a duty is void
• company may advance expenses to a director to defend litigation in any
proceedings arising out of the director’s service to the company
• company can take out indemnity insurance to protect a director against any
liability or expenses for which the company is permitted to indemnify a
director
• company can also take out indemnity insurance to indemnify itself against
any expenses that the company is permitted to advance to a director or for
which the company is permitted to indemnify a director
 INDEMNIFICATION AND DIRECTORS'
INSURANCE
• Company may not directly or indirectly pay any fine that may be imposed on the
director of the company, or of a related company, who has been convicted of an
offence in terms of any national legislation

• Company may not indemnify a director in respect of liability arising out of certain
circumstances

• page 170 of textbook

• S 78 (8) - company can claim restitution form a director of the company or of

a related company for any money paid by the company on behalf of that
director in any manner inconsistent with the restriction
NUMBER OF DIRECTORS AND CONSENT

Public • at least one

company director

Private •at least three

company directors

S66 (11) - where the company does not have the prescribed minimum number of directors this does
not negate or limit the authority of the board, nor does it invalidate anything done by the board or the
company
 VARIATION OF CERTAIN PROVISIONS BY
THE MOI
• Certain provisions concerning directors in the 2008 Act may be varied by the
company’s MOI / others may not be varied in that way

• Table 6.6 in textbook on page 173

 INELIGIBLE AND DISQUALIFIED
PERSONS
• Certain persons disqualified / ineligible from being directors and
o an alternate director

o a prescribed officer

o any person who is a member of a committee of a board of a company or of

the audit committee of a company, irrespective of whether such person is
also a member of the company’s board
Ineligible Disqualified

absolutely prohibited Except persons being

from becoming a prohibited by a court of
director of a company law
and there are no
exceptions to this
prohibition
the other
disqualifications provided
for in the Act are not
absolute, and a court has
- juristic person a discretion as to
whether to allow such
disqualified persons to be
appointed as a director
- unemancipated minor
/ person under similar
legal disability
prohibited by court of law

person who does not

satisfy any person declared to be a
requirement in a delinquent
company’s MOI

unrehabilitated insolvent

person prohibited by
public regulation

convicted / imprisoned for

theft / fraud / forgery /
perjury

a person disqualified in
terms of a company’s MOI
 EXEMPTIONS TO DIRECTOR
DISQUALIFICATION
• S69 (11)
• gives a court a discretion to grant an exemption from being disqualified from
appointment as a director
• Following persons may apply to court for such an exemption:
• an unrehabilitated insolvent
• a person who was removed from an office of trust for dishonest
misconduct; or
• a person who was convicted of a crime with an element of dishonesty
• Ex parte application
• Must prove to court that he/she has been rehabilitated from his / her wrongful
ways and can be trusted with the responsibilities of directorship
• Examples on pages 177-178 of textbook
 APPLICATION TO
DECLARE A PERSON
DELINQUENT OR
UNDER PROBATION

• S162

• A court can declare a person to be a delinquent or to

be under probation

• Following persons can apply for such an order:

• a company
• a shareholder
• a director
• a company secretary or prescribed officer
of a company
• a registered trade union that represents
employees of the company
• any other representative of the employees
of a company
• the Commission
• the Takeover Regulation Panel
 APPLICATION TO DECLARE A PERSON
DELINQUENT OR UNDER PROBATION
• A person who has been declared to be a delinquent is disqualified from being a
director

• Table 6.9 sets out grounds for delinquency application

• person consented to serve as a director, or acted in the capacity of a director

or prescribed officer, while he or she was ineligible or disqualified
• the person acted as a director while under probation and in contravention of
such order under the Companies Act, 2008 or under S47 of the CC Act
• the person, while a director, grossly abused the position of director
• the person took personal advantage of information or an opportunity contrary
to S76 (2)
 APPLICATION TO DECLARE A PERSON
DELINQUENT OR UNDER PROBATION
• Grounds for delinquency application continued…

• the person intentionally or by gross negligence inflicted harm upon the

company or a subsidiary of the company contrary to S76 (2)(a)
• the person acted in a manner that amounted to gross negligence, willful
misconduct or breach of trust
• the director engaged in unauthorised / reckless or fraudulent activities
• the director failed to vote against a resolution taken at a meeting although the
company did not satisfy the solvency and liquidity test
• the person acted in a manner materially inconsistent with the duties of a
director
• the person acted in, or supported a decision of the company to act in an
oppressive or unfairly prejudicial manner
 APPLICATION TO DECLARE A PERSON
DELINQUENT OR UNDER PROBATION
• Commission or the Takeover Regulation Panel may rely on the following
additional grounds:
• the person has repeatedly been personally subject to a compliance notice or
similar enforcement mechanism, for substantially similar conduct, in terms of
any legislation
• the person has at least twice been personally convicted of an offence, or
subject to an administrative fine or similar penalty in terms of any legislation
• the person was a director of one or more companies or a managing member
of one or more close corporations or controlled or participated in the control
of a juristic person, irrespective of whether concurrently, sequentially or at
unrelated times, that were convicted of an offence or subjected to an
administrative fine or similar penalty within a period of five years
• Case study : Kukama v Lobelo
 SUSPENDING AND SETTING ASIDE
ORDERS OF DELINQUENCY
• Person declared delinquent may apply to court as follows:

• to suspend the order of delinquency and substitute an order of probation with

or without conditions, any time from three years after the order of delinquency
was made

• to set aside an order of delinquency at any time from two years after it was
suspended

• Court may not grant the order applied for unless the applicant has satisfied any
conditions that were attached to the order
 SUSPENDING AND SETTING ASIDE
ORDERS OF DELINQUENCY
• Court may grant an order if

• having regard to the circumstances leading to the original order and

• the conduct of the applicant in the ensuing period

• court is satisfied that the applicant has demonstrated satisfactory progress

towards rehabilitation, and

• there is a reasonable prospect that the applicant would be able to serve

successfully as a director of a company in the future
 FIRST DIRECTORS OF A COMPANY

• Every incorporator is deemed to be a director until sufficient directors have been

appointed to meet the required minimum number of directors

• If number of incorporators, ex officio directors and appointed directors less

than minimum number of required directors

• board must call a shareholder’s meeting within 40 business days after the
date of incorporation for the purpose of electing sufficient directors to fall
all vacancies on the board at the time of the election
 VACANCIES ON THE BOARD

Person ceases to be a director and a vacancy arises on the board

in the following circumstances:
the person
becomes
the person is
incapacitated
in the case of placed on that person is
to the extent
when the an ex officio probation removed from
that the person director, the office by
period for a under becomes
is unable to
director’s fixed he / she is person ceases conditions that ineligible or resolution of
perform the the person
term contract declared a to hold the are disqualified the
functions of a resigns or dies
expires as delinquent office or titled inconsistent from being a shareholders
director and is
provided for in that entitled with director or resolution of
unlikely to
the MOI the person to continuing to the board or by
regain that
be a directo be a director of order of court
capacity within
the company
a reasonable
time
• Vacancy

• other than as a result of an ex officio officer ceasing to hold office

• must be filled by a new appointment
• or new election conducted at the next AGM of the company
• otherwise within 6 months at a shareholders’ meeting / poll
• to remaining directors, any shareholder may convene a meeting to elect
directors
• Company must file a notice with the Commission within 10 business days
after a person becomes / or ceases to be a director of the company

• Removal

• Director may be removed by the shareholder and in some instances by the

board of directors
 BOARD COMMITTEES AND THE AUDIT
COMMITTEE
• S72 provides that the board of directors may appoint any number of board
committees and may delegate any of the authority of the board to a committee.

• However, a director cannot use the appointment of a committee as shield against

his/her own responsibility

• S72 (3) states that a particular director will remain liable for the proper
performance of a director’s duty despite the delegation of the duty to a
committee

• The committee may comprise of persons who are not directors of the company
and will have full authority i.r.o matters referred to it

• Every SOC and listed company must appoint a social and ethics committee
 BOARD COMMITTEES AND THE AUDIT
COMMITTEE
• A public company, SOC and any other company required by its MOI must have
an audit committee
• appointed by the shareholders
• members must be directors

• King III proposals on board committees:

• Remuneration committee
• Nomination committee
• Risk management committee
Activity: True / False
• Directors have a duty to act with regard to the views
or decisions of the shareholder who appointed them.

• The Companies Act endorses the view that a company should

single board of directors consisting of both executive and non-
executive directors.

• A director who is also an employee of the company is referred

to as a non-executive director.

• The number of directors of a public company must at least be

three directors.

• A juristic person is disqualified from occupying the position of a

director.
Feedback: True / False
• False. PPWAWU National Provident Fund v CEPPWAWU,
the director is not the servant or agent of the shareholder.

• True.

• False. A director employed by the company is referred to as

an executive director.

• False. A public company must have at least 1 director.

Private companies must have at least 3.

• False. A juristic person is may not hold the office of a

director because juristic persons are ineligible.
What Happens Next?
• Remedies and enforcement
• Chapter 14